Understanding Taxes

Tax Implications of Selling or Renting a House

image Nowadays it’s common for working professionals to relocate due to better career opportunities or other reasons. If you own a property and asked to relocate what do you do? Do you sell the property or rent it out? There is a very strong tax angle in making such decisions: 

 

Tax on House property Let out

When you let out your house for rent then you will receive income which is taxable. The taxable income from the total rent income received in a particular year is computed as follows.

Rental Income Computation

Municipal Rental Value (MRV): Rental value fixed by Municipal authorities based on the periodical survey conducted in their local limits.

Fair Rental value(FRV): It refers to the rental value a house property can fetch. It is based on the rent prevailing for similar type of accommodation in same or similar type of locality.

Standard Rent: It is the rent fixed under rent control Act, where so ever applicable

Expected Rental Value: MRV or FRV which ever is higher is selected and then such higher figure is compared with standard rent and whichever is lower is selected ERV.

Annual Rental Value: It the actual rent received or receivable is ore than ERV such rent received or receivable is annual Rental value.

 

For example,

Municipal Value of House property =10,000 P.M (1,20,000 P.A)

  • Fair Rental Value = 12,000 P.M (1,44,000 P.A)
  • Standard Rental Value=11,000 P.M (1,21,000 P.A)
  • Expected Rental Value =11,000 P.M (1,21,000 P.A)
  • Actual Rent Received =13,000 P.M (1,56,000 P.A)
  • Annual Rental Value=13,000 P.M (1,56,000 P.A)
  • Municipal Taxes Paid=5,000 P.A

Annual Rental Value =1,56,000

Less: Municipal Taxes=5,000

Net Annual Value=1,51,000

Deduction u/s 24:

Standard Deduction 30% of NAV =45,300

Interest on Loan fro purchase of house=Nil

   

Taxable income from house property = Rs 1,05,700 (1,51,000 – 45,300)

      

Tax on selling the house property

Let us also quickly consider what happens if you decide to sell your property.

Any profit that you receive by selling any capital asset at a price higher than at which it was acquired by you is a capital gain and is taxable under the head Capital Gains. Capital Gains are of two types.

 

Short term and long term capital gains

If you sell your house within 3 years from the date of purchase you will incur a short term capital gain or loss .In case you sell your house beyond three years then it is considered as a long term capital gain/loss.

  

Exemptions from capital gains tax

If you choose to use the capital gains from selling your house to buy a residential property, you will not be taxed and there is no tax liability from such a sale as stated under Section 54 of the Income Tax Act.

 

You can also be exempted from tax if the long term capital gains or profit from the sale is invested for a period of 3 years in specific bonds of National Highways Authority of India or Rural Electrification Corporation Limited as stated under Section 54 EC.

 

In case you do not choose to make any investments and opt to pay tax, the income is calculated using the indexation method which is nothing but accounting for the effects of inflation.

 

For Example, if you sell the house property at Rs 50,00,000 in the year 2010-11,which is purchased in the year 2005-06 at Rs.20,00,000

Sale price=50,00,000

Less: Selling expenses=25,000

Net sale consideration=49,75,000(50,00,000 – 25,000)

Less: Cost of Purchase (with Indexation) =35,02,463

Taxable Long term capital gain=14,97,537

Tax on long term capital is at 20 % i.e. 2, 99,507

    

Understanding the tax implication on renting or selling a house property keeps you in better position to choose among the two options and also helps in filing your income tax return with clarity 

   

Author: Sridhar Nag

  

Income Tax Calculator

Published Jun 24 2011




Comments

Comments

 

CA Karan Batra said:

Very useful article Sridhar

I would like to add another point that now u/s 54, the tax exemption is limited to Rs. 50 Lakh per assessee per annum

June 25, 2011 4:39 AM
 

sonal.mahimkar@gmail.com said:

Hi,

Very useful and clear info. Thanks Sridhar

I have one query.

I have sold my flat (this was bought in 2006) and paid some money to buy new underconstructed property and will get possesion in next year. As per your given calculation I have Long Term Capital Gain. Since I will buying new flat with this money, I guess I will not have to pay Tax on this long term capital gain.

My question is do we have to show this flat sale amount and also Capital Gain exempted in Income Tax Return.

Thanks

July 4, 2011 2:02 AM
 

brij@idbi.co.in said:

Within how much period from the sale of house, should one buy new property so that there is no long term capital gain?

Also, if new property is booked with a builder and full payment is made, is it necessary to have possession of the property also within the period defined in my last query?  

July 27, 2011 5:36 AM
 

Vinod said:

As per the article, I understand that I can gain tax exemption if entire gain is re-invested in another property....that is in the case of both short and long term capital gains...is this understanding correct

August 13, 2011 10:46 AM
 

Nitin said:

brij@idbi.co.in said:

Within how much period from the sale of house, should one buy new property so that there is no long term capital gain?

Also, if new property is booked with a builder and full payment is made, is it necessary to have possession of the property also within the period defined in my last query?  

Answer to Q.1 - One year before the sale or within two years after the sale.

Answer to Q.2 - No need of possession as "acquisition" is what is required by law.

August 25, 2011 4:30 AM

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